NEW YORK  Internal Merrill Lynch e-mails provide
the backbone of evidence Eliot Spitzer is using to support his charges that
the Wall Street powerhouse epitomized the conflicts of interests that became
so rife among top brokerages in the '90s bull market.

The New York attorney general has filed an affidavit containing
e-mail messages that he says reveal Merrill rarely used "reduce" or "sell" recommendations
and that its analysts not only promoted stocks they did not believe in, but
also knew that the more investment banking work they brought in, the bigger
their pay and bonuses would be. Merrill says there is "no merit" to Spitzer's
charges and that its e-mail has been taken out of context.

But in an e-mail sent to employees Thursday, Merrill appeared
to backtrack. "Over the next week," the memo said, "we will be negotiating in
good faith with the attorney general's office to see if we can agree on additional
disclosure regarding investment banking relationships with covered companies,
as well as the distribution of buy, hold and sell recommendations within industry
sectors. Merrill Lynch has long been a leader in setting standards for research,
and we are going to work with the attorney general to see if we can set those
standards even higher."

Spitzer says Merrill has a lot of work to do if it is sincere.
He points to some e-mails involving Henry Blodget, Merrill's high-profile Internet
analyst who left the bank last year:

On several occasions, Blodget was publicly bullish on stocks that he dismissed
as garbage privately. Most of the companies were giving Merrill investment
banking business.

For instance, Blodget kept Internet search company InfoSpace
on Merrill's "Favored 15" list from at least August 2000 until Dec. 5, 2000,
although Blodget acknowledged as early as July that the stock was a "powder
keg." In October 2000, he referred to it as a "piece of junk." In March 2000,
the stock was trading at $132. On Friday it was treading water at $1.46.

In another reference, after initiating coverage of Internet
company GoTo.com, an institutional investor wrote: "What's so interesting
about GOTO except banking fees." Blodget replied: "nothin (sic)." GoTo.com
no longer exists.

"This is brazen," Spitzer says. "It didn't appear to
us that this (behavior) was something around the edges, something that occasionally
occurred. It seemed to be par for the course."

By the end of 2000, Blodget began to get fed up with constant pressure coming
over the so-called Chinese Wall that is suppose to separate investment bankers
and analysts. He threatened to start to rate stocks honestly, no matter what
the investment banking consequences were. His outburst was prompted by complaints
from a longtime broker who felt burned by late downgrades of certain stocks
covered by Merrill.

"The more I read of these, the less willing I am to cut
companies any slack, regardless of predictable temper-tantrums, threats, and/or
relationship damage that are likely to follow (from investment banking)," Blodget
wrote in late 2000. "If there are no new e-mail forthcoming from Andy (Melnick,
then head of global equity research at Merrill) on how the instructions below
should be applied to sensitive banking clients/relations, we are going to just
start calling the stocks (stocks, not companies), like we see them, no matter
what the ancillary business consequences are."

"Basically he's saying, 'Hey I'm going to threaten you
with the truth,' " Spitzer remarks. "The brazenness of that, and the insight
into what was going on was so overwhelming it speaks to the generic nature of
what was going on. It was commonplace that the research was being tainted by
the investment banking desires of the firm and there was a complete absence
of compliance or intervention. It was the Wild West."